US DOJ claims against Tornado Cash likely pose threat to Ethereum smart contracts

  • Charges brought by the US Department of Justice against Tornado Cash co-founders accuse the defendants of conspiracy to commit money laundering. 
  • Tornado Cash co-founders’ indictment potentially criminalizes software code publication, according to a crypto advocacy group. 
  • The criminalization of software codes could have long-standing effects on several crypto projects.

The US Department of Justice (DOJ) brought charges against Tornado Cash and co-founders Roman Storm and Semonov with unlicensed money transmission.

Crypto advocacy group, Coin Center, came out in support of Tornado Cash, stating that the claims against Tornado Cash co-founders likely criminalize software code publication. This may not align with the Financial Crimes Enforcement Network (FinCEN) guidelines issued in 2019.

The claims against Tornado Cash are likely to have ripple effects in the crypto ecosystem, since Ethereum smart contracts are code, just like Tornado Cash, a crypto mixer that works for Ether and ERC-20 tokens. 

Also read: Bankrupt FTX to pay creditors in dollars as it plans to liquidate $3 billion in crypto

Crypto advocacy group supports Tornado Cash against DOJ claims

Coin Center, a non-profit focused on policy issues facing cryptocurrencies, recently voiced its support for Tornado Cash co-founders. The DOJ claims that Semenov and Storm were involved in money laundering to the tune of $1 billion for hackers like North Korea’s Lazarus Group. 

The indictment against the defendants says Tornado Cash co-founders are engaged in the business of transferring funds on behalf of the public, without registration with the FinCEN. However, Coin Center argues that the activities described in the indictment seem more related to software provision and communication services than money transmission. 

According to Coin Center’s Research Director, Peter Van Valkenburgh, the indictment against Tornado Cash co-founders likely criminalizes software code publication. 

Coin Center interprets FinCEN's guidance and explains that an anonymizing software provider is not a money transmitter. 

The indictment against Tornado Cash likely poses a threat to smart contracts on Ethereum

The Ethereum website defines smart contracts as “computer programs stored on the blockchain.” Criminalization of software code publishers could cause a stir in the community of smart contract developers and publishers on the Ethereum blockchain.

It will be key how  US financial regulators address this matter as the Securities and Exchange Commission (SEC) is currently engaged in lawsuits against crypto exchanges and firms, debating whether the assets traded on their platforms are securities. Further, there is speculation that the SEC is likely to approve Ethereum Futures ETFs ahead of Bitcoin. Find out more about it here.

Regulators need to clarify their stance on whether software code publication can be criminalized, before key decisions are made in crypto-related cases in the US. Coin Center urged the US Congress to provide more precise crypto regulation.

Cryptocurrency metrics FAQs

What is circulating supply?

The developer or creator of each cryptocurrency decides on the total number of tokens that can be minted or issued. Only a certain number of these assets can be minted by mining, staking or other mechanisms. This is defined by the algorithm of the underlying blockchain technology. Since its inception, a total of 19,445,656 BTCs have been mined, which is the circulating supply of Bitcoin. On the other hand, circulating supply can also be decreased via actions such as burning tokens, or mistakenly sending assets to addresses of other incompatible blockchains.

What is market capitalization?

Market capitalization is the result of multiplying the circulating supply of a certain asset by the asset’s current market value. For Bitcoin, the market capitalization at the beginning of August 2023 is above $570 billion, which is the result of the more than 19 million BTC in circulation multiplied by the Bitcoin price around $29,600.

What is trading volume?

Trading volume refers to the total number of tokens for a specific asset that has been transacted or exchanged between buyers and sellers within set trading hours, for example, 24 hours. It is used to gauge market sentiment, this metric combines all volumes on centralized exchanges and decentralized exchanges. Increasing trading volume often denotes the demand for a certain asset as more people are buying and selling the cryptocurrency.

What is funding rate?

Funding rates are a concept designed to encourage traders to take positions and ensure perpetual contract prices match spot markets. It defines a mechanism by exchanges to ensure that future prices and index prices periodic payments regularly converge. When the funding rate is positive, the price of the perpetual contract is higher than the mark price. This means traders who are bullish and have opened long positions pay traders who are in short positions. On the other hand, a negative funding rate means perpetual prices are below the mark price, and hence traders with short positions pay traders who have opened long positions.

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